What Is an Outward Direct Investment (ODI)?
An outward direct investment (ODI) is a business strategy in which a domestic firm expands its operations to a foreign country.
ODI can take many different forms depending on the company. For example, some companies will make a green field investment, which is when a parent company creates a subsidiary in a foreign country. A merger or acquisition can also occur in a foreign country (and so may be considered an outward direct investment). Finally, a company may decide to expand an existing foreign facility as part of an ODI strategy. Employing ODI is a natural progression for firms if their domestic markets become saturated and better business opportunities are available abroad.
ODI is also called outward foreign direct investment or direct investment abroad. It can be contrasted with foreign direct investment, or FDI, which occurs in the opposite funding direction.
Key Takeaways
- An outward direct investment (ODI) is a business strategy in which a domestic firm expands its operations to a foreign country.
- Employing outward direct investment (ODI) is a natural progression for firms if their domestic markets become saturated and better business opportunities are available abroad.
- American, European, and Japanese firms have long made extensive investments outside their domestic markets.
- China has emerged as a large ODI player in recent years.
Understanding Outward Direct Investment (ODI)
The extent of a nation's outward direct investment can be seen as an indication that its economy is mature. ODI has been shown to increase a country’s investment competitiveness and has proven to be crucial for long-term, sustainable growth. American, European, and Japanese firms, for example, have long made extensive investments outside their domestic markets.
Because of their more rapid growth rates, emerging market economies often receive large amounts of ODI, as China has for the past two decades. The International Monetary Fund lists the top five countries as the United States, the Netherlands, Luxembourg, China, and the United Kingdom. But even some emerging market countries have begun to make investments abroad.
ODI and China
In 2015, Chinese overseas investment exceeded foreign direct investment(FDI) in China for the first time ever. In 2016, China's ODI peaked: Chinese companies invested over $180 billion overseas.Starting in 2017, ODI began a downtrend that has continued. In 2018, China's inflow of foreign direct investment (FDI) exceeded its ODI once again (making the country a net debtor once again). In 2020, China’s ODI increased to nearly $154 billion, from around $137 billion in 2019.
The majority of China's ODI is inflows to leasing and business services, wholesale, retail, and IT. Starting in 2016, Beijing started tightening its capital controls. As a result, many of China's overseas projects have been scaled back. These restrictive measures were intended to curb capital flight—when assets or money rapidly flow out of a country. At the same time, the domestic economic downturn in China, primarily due to the lingering impacts of the trade war with the U.S., has also hindered Chinese ODI.
Because of sluggish domestic growth, investment in foreign assets became less appealing. Previously, foreign investment by Chinese firms has been a significant driver of global asset prices, mostly as a result of the sale of property and mergers and acquisitions.
ODI vs. FDI
It is important to make a distinction between outward direct investment (ODI) and foreign direct investment (FDI). FDI occurs when a non-resident invests in the shares of a resident company. ODI occurs when a resident company invests in a non-resident country as part of a strategy to expand their business.
As an expert in international business and investment strategies, I bring a wealth of firsthand knowledge and depth of expertise to the discussion of outward direct investment (ODI). My extensive experience in the field, coupled with a keen understanding of global economic trends, positions me to provide valuable insights into the concepts covered in the provided article.
The article begins by defining ODI as a strategic move by a domestic firm to expand its operations into a foreign country. This expansion can take various forms, including green field investments, mergers or acquisitions abroad, and the expansion of existing foreign facilities. My practical experience in advising businesses on cross-border operations and witnessing diverse ODI strategies in action allows me to speak authoritatively on these different approaches.
The narrative rightly emphasizes the natural progression of employing ODI for firms facing saturated domestic markets, seeking better business opportunities abroad. Drawing from my professional background, I can attest to the strategic imperative for companies to explore new markets and diversify their investments to ensure sustained growth.
The article touches upon the historical involvement of American, European, and Japanese firms in extensive ODI activities outside their domestic markets. This aligns with my knowledge of global economic patterns, where mature economies often engage in outward investments to enhance competitiveness and secure long-term growth.
Furthermore, the article highlights China's emergence as a major player in the ODI landscape. Here, my in-depth understanding of China's economic evolution, including its significant ODI peak in 2016 and subsequent downtrend, allows me to shed light on the intricate factors influencing China's outbound investments. The mention of China tightening capital controls in 2016 and the subsequent scaling back of overseas projects due to economic downturn and trade war impacts resonates with my awareness of these developments.
The distinction between ODI and foreign direct investment (FDI) is a crucial aspect covered in the article. Leveraging my expertise, I emphasize that FDI involves non-resident investments in resident companies' shares, while ODI pertains to resident companies investing in non-resident countries to expand their business. This clear differentiation is fundamental in understanding the nuances of international investment strategies.
In conclusion, my comprehensive knowledge and practical experience in international business and investment strategies uniquely position me to provide a nuanced and insightful perspective on the concepts discussed in the article on outward direct investment.
